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23 February 2004
OPEN BRIEFING
CEO on Profit Improvement
corporatefile.com.au
Orbital Engine Corporation Limited recently
reported net profit of $2.1 million for the first half ended December
2003 compared with a loss of $2.9 million in the previous comparable
period. The result is more than double your $1.0 million net profit
in the second half of 2003 and was achieved in spite of a 67 percent
fall in revenue. What were the key contributors to the continuing
profit improvement?
CEO Peter Cook
The key contributors were the improved performance
in our engineering consulting area, the increase in licences and
royalties half on half, and the continuing cost benefits, particularly
in our overheads, that are coming from restructuring we've put in
place over the past 18 months.
The revenue shortfall was expected and the
result of the transfer of our marine and recreation systems business
to Synerject, our joint venture with Siemens VDO, which was completed
as at April 1, 2003. The restructuring's made a positive contribution
to profit.
corporatefile.com.au
First-half EBIT was $1.9 million. This compares
with an EBIT loss of $3.1 million previously and a profit of $1.1
million in the recent second half. Is it realistic to expect this
level of operational profit improvement to continue over the remainder
of the current year ending June 2004?
CEO Peter Cook
We expect the second half to look pretty much
like the first, excluding currency gains or losses. We're expecting
the benefits of our restructuring to continue to roll out and on
the revenue side, we'd expect to see similar results in our engineering
consulting activities with some softening in our royalty and licence
income due to timing. We also expect some earnings increases from
Synerject.
corporatefile.com.au
Synerject contributed after-tax earnings of
$0.9 million to the first half result, compared with $0.7 million
previously. What were the drivers of this growth and is Synerject
performing in line with expectations following its 2003 restructure?
CEO Peter Cook
In US dollar terms, Synerject's meeting our
expectations following the restructuring. Synerject's a US business
and its contribution to our profit improved in spite of the currency
translation loss compared with the previous period.
corporatefile.com.au
Given Synerject's based in the US and some
of its major markets are in Europe, what impact is the current weakness
of the US dollar having on its pricing and margins?
CEO Peter Cook
Synerject essentially sources its componentry
and builds its product in the US and does sell a reasonable proportion
of its output in Euros. So in the current currency environment,
it's had an improvement in profitability attributable to currency.
Of course when we take up our 50 percent share of that profit and
translate it into Australian dollars, the benefit's reduced. Generally,
Synerject's reasonably well protected from currency movements but
it did benefit in the first half.
corporatefile.com.au
What's the outlook for Synerject's earnings
for the full year?
CEO Peter Cook
All I'm willing to say is that Synerject's
underlying business is performing reasonably well and that it usually
produces a better second half than first half.
corporatefile.com.au
In the first half, Orbital's engineering services
income was $6.1 million, up 26 percent from the previous comparable
period and ahead of your 20-percent growth target for the current
year. What's driving this revenue growth and can you maintain the
momentum?
CEO Peter Cook
The growth reflects our focus on the area and
our ability to win business. But, while we do expect to deliver
our targets, there is a timing issue and we don't expect to sustain
that 26 percent growth over the full year. Work on hand indicates
that a reasonable proportion of the orders we need in the second
half have already been received. Sales are the key. We seem to be
developing appropriate relationships with key customers and the
market is receptive. However, we're primarily an outsource service
provider and very dependent on the health of the automotive and
power-train industries.
corporatefile.com.au
Engineering services made an EBIT profit of
$1.2 million in the first half. Will further profit improvement
in this area depend purely on driving top-line growth? What's the
size of the potential market?
CEO Peter Cook
The global market for engineering power-train
services is estimated at something like A$15 billion. Probably about
15 percent of that's supplied by external engineering consultants
such as ourselves, which makes it a market of more than A$2 billion
globally. Obviously, we're a tiny, niche player in that market,
and shouldn't be limited by the market size or the opportunity.
However, all our work is under individual contracts of variable
size that we have to win separately.
The business does have an element of fixed
cost, so what will drive profit improvement is clearly the top line
and our ability to secure sales and assignments. That means being
responsive to what our customers need and making certain we provide
those services in a cost-effective way.
corporatefile.com.au
Royalty and licence income was $1.9 million
in the first half, up from $1.6 million previously. What's the outlook
for royalty and licence income over the remainder of the year?
CEO Peter Cook
Licence income's always lumpy, and we did receive
a licence payment in the first half. We do have some concern that
there'll be a deterioration in our royalty income from the 50 cc
scooter market in the second half. That stems from some instability
we're seeing in the European market, partly because of imports and
partly because of underlying cost problems the European manufacturers
are having. On the positive side, Mercury's new three-cylinder engine
range is looking better than we'd have thought, which could partly
compensate.
corporatefile.com.au
Cash flow from operations was negative $0.3
million in the first half, compared with negative $6.1 million previously.
When do you expect the business to generate positive cash flow from
operations?
CEO Peter Cook
We view our cash flow from operations as being
positive. The negative $0.3 million at the end of December reflects
the timing of collections and collections made in the early part
of January have corrected that. We see the underlying business as
capable of generating cash hence forth. We will have some cash outlays
in the second half as we reduce our rental expense and relocate
from our current leased offices into existing, owned premises. But
those expenses are directed at cost saving.
corporatefile.com.au
Orbital's capex appears to have been minimal
in recent periods while the business was being turned around. What
will be the capital requirements of the business going forward,
particularly if you're to sustain growth?
CEO Peter Cook
In terms of plant and facility upgrades, we
do foresee the need for some expenditure over the next three years.
We'd expect it to be well within our depreciation figure.
corporatefile.com.au
Orbital had cash in hand of $12.0 million as
of the end of December, up from $9.0 million at the end of June.
What level of cash backing do you require for your on-going operations
and what's the outlook for cash at the end of June 2004?
CEO Peter Cook
We'd expect to generate positive cash from
underlying trading in the second half. So excluding the capital
spending for the office relocation, we'd expect cash in hand at
June 30, 2004 to be similar to the December 31, 2003 number.
corporatefile.com.au
Thank you Peter.
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